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Thursday, July 29, 2010

THE BEGINNING OF THE END?

Well the last post was fun ...but I think it's time to move on to something else.

Something significant did happen today. The dollar broke through the 82 support zone. This is the first condition of three that will tell us if the almighty dollar is now caught in the clutches of the 3 year cycle decline.

The other two are a break below 80 and the next intermediate cycle must turn out to be a left translated and failed cycle.

But let's start with the current daily action. First off a little cycle information. "Most" daily cycles (for the dollar) tend to run about 20 days but can stretch up to 30 and not be abnormally long. Also note that most left translated cycles tend to drop below the previous cycle bottom. A left translated daily cycle is one that tops in 10 days or less.

Here is a 7 month chart of daily cycles. I've marked the troughs with a blue arrow and noted the length. If the cycle was left translated I marked it with an L.

As you can see the last three cycles have all been left translated and they all bottomed below the prior cycle bottom.

The last cycle, and it now appears the current cycle, were and are extremely left translated. Those tend to produce the worst declines. The break of 82 today not only meets my first warning sign that the dollar is now in the grip of the 3rd year cycle low, it also puts the odds heavily in favor of July 16th marking the last daily cycle bottom.

The reason that is important is because the cycle is only on day 9. There should still be 2 to 3 weeks left before the next major bottom.

One of the conditions necessary for the stock market to continue rallying is for the dollar to continue falling. Today's action is a big check mark in the continuation theory.

As you can see each one of the major impulsive moves down in the dollar sparked powerful rallies in stocks.

As we still have at least a couple for weeks before the next major bottom we should see the stock market rally at least another 2 to 3 weeks. That is going to force the current daily cycle for stocks into a right translated cycle. As I said before those tend to hold above the prior cycle bottom.

Keep in mind I'm just guessing on levels. I'm just illustrating general trajectories and time frames not actual targets.

At that point the dollar will be ready to put in a major intermediate cycle low and we should see a more substantial rally. If that rally fails and moves below the August bottom then we can close the book on the dollar. At that point there will be virtually no question that the 3 year cycle low has its hooks in the dollar and off we will go.

This should spark extreme inflationary pressures and as I've pointed out before every C-wave in gold has been driven by a major leg down in the dollar. I have no doubt the current C-wave will be driven by the dollar falling (maybe crashing) into the major 3 year cycle low.

I've said many times that Bernanke is going to pay a price for his insane monetary policy. In the world we live in one just doesn't get away scott free after printing trillions of dollars.

Heck Greenspan didn't get away with printing billions after the tech bubble burst. The end result was a housing & credit bubble that ultimately burst and sent the world into the second worst recession since the Great Depression. Does anyone seriously think Bernanke can one up Greenspan by many, many multiples and not have anything bad happen?

I can assure you that you are dreaming if you think the market is just going to "let this one slide".

There are going to be extreme unintended consequences and I'm about 99% sure they are going to come at the dollar's 3 year cycle bottom next year.

104 comments:

Fantastic site Gary. The old relationships of Gold, Dollar, and Treasuries are breaking down. Now I just focus on the COT data to try to time gold and we're seeing lots of commercial support at these levels while the large traders and small specs are dumping. Your cycle stuff is very interesting though. Question is, has the troll meters registered a buy signal yet? Keep up the good work on this site!

I fully agree with your analysis of prices breaking below "obvious" support levels then reversing quickly as a good sign of trend change. Not sure if the recent sell-off in the 1060 range was it, but I agree that we're close. Although it is very darn scary to buy now!

Poor troll boy was hoping to cover his gold short at $1150, but it wasn't to be.

I'm sure glad I bumped up my purchase limit to $1160 the other day when Gary made his purchase. The best thing is we're heading into the strongest season right now, and I was able to get a bigger position while gold was on sale.

Must be awake this early in the AM.This is the nap blog.Listen loser. The stock market has a long way to go to the down side. I am playing the short stocks like you are playing long gold. Get IT!!!I thought you would sooner or later.Just stay focused on what you are doing and stop worrying about what others are doing. This is the problem with this blog. And dare not disagree with G-mon!

Yo Nap GirlMy avg short is at least $50 above current levels with a trailing stop.The problem with you longies is when we go down you have no exit because of the one dimentional view you have. No risk management will end you in the unemployment line. Ooops you have no job, sorry!

Well at least you took the trade even if it was too large a position and on the wrong side. Most of us didn't even think you had an account any longer!

And don't say we didn't tell you to cover the last two days. You've left 40% of your profit behind and who knows if any will be left by Monday.

You're getting spanked, so I won't plan on seeing you around much today. And fro your buddy UK, he's already done. I've NEVER seen anybody vaporize so quickly, not even you're that bad. Congratulations, you're not the worst!

Gary our host knows his gold, but I think he struggles with macro issues, and certainly with markets.

I sold the market short all the way down through 2008/09. Didn't trade it back up, couldn't see it lasting, but it did, my mistake.

This time round, I shorted it from 1220, banked some coin. And I shorted it again recently. The recent bounce was not unexpected, and I've added to positions.

I don't care whether the markets go down today, next week, or next month, as I have long-term positions...any time this year will do me just fine.

I don't trade gold, but will be buying some physical via Bullion vault if this trade works out for me, but at lower prices I hope. I do however think Gold has further to fall, as deflationary pressures take hold.

Exciting times, the world is going to hell, get short stocks and long gold.

Gary-UK do you really think anyone here is going to believe you shorted the exact top in the stock market?

You have shown the least ability to pick turing points of anyone on the board and you want us to believe you spotted the exact top of that monster rally in April? You and troll boy are the most emotional traders here.

You are so right! I am buying bonds now for .55% yield. Sold all my gold and double levered into bonds to get half a percent of yield. With my double leverage though that would be a full percent. Well worth the risk. Thanks for the call!

And yet in the face of deflation, the gold goes higher. Much higher by the end of the day.

Troll likes to fight. He fights with markets, fights with us....always fighting. I'd suggest he take the path of least resistance, and join the winning team, but he wouldn't/couldn't listen. It is necessary to make and keep money. Perhaps troll boy learn this some day but it's going to be a bumpy road until then, up one day and down the next with little if any actual profits. People can do this for years and not wise up, as each minor victory reinforces the fighter mentality.

I won't be able to spend much time having fun here today, as the wife and me are headed to the county fair later. Splendid weather today, and watching the computer all day when I'm in a strong hand is not what life is about.

Nap Girl, you are totally effen clueless. The main thing is you obviously can't read. Jeez where did you study economics. Do you know what that is even?Please go take a nap as you add absolutly nothing to the blog. Have you ever made a trade?Snooze girl is clueless!

I think we were all that way at one time. I think troll boy will see the light at some point. Troll boy will become old turkey boy at some point. Well maybe, well doubt it. Well, great call on that bond. Wow, 1/2% yield, man does that entice me to buy!!

I am getting my blogs in now too. Yes I am a SMT addict, and I need help. Going old turkey has sure opened up life again. Today is a nice sunny day where I am, drinking coffee now as I fully wake up, and then taking the kids out.

Even if you can trade and make more, which traders don't for the most part, you still haven't factored in life as a cost.

Would it be too much to ask the various bulls and bears to post something other than "Stocks are tanking!" "Gold is flying" etc.?

It gets pretty repetitive. If you have a reason or an observation to add to justify your position, then by all means, let 'er rip.

But the steady stream of chest-beating and insults ... yawn.

There really are only two outcomes. Either the market moves in your direction, in which case you look like a jackass for lording over those positioned the other way (making money isn't satisfying enough by itself?), or it doesn't, in which case you look like a fool.

Either add something to the conversation, or jackass or fool appear to be the choices.

I choose jackass! Or a foolish jackass! Either way, old turkey is not chest beating its a way of encouraging others to get off the freaking computer. Almost done my coffee, so I will be out in 2 minutes. Don't need to hear me go on.

O.K. guys, I'm a little tired of the insults and useless predictions with exclamation points and no evidence. I'm going to start posting my real time trades (at least the ones I do in size) I've been trading for 35 years and will trade any ETF. I don't do much with individual stocks because of overnight gap risk. I fade extremes.I play with very tight stops and win on 30% of my trades, but the winners are much bigger than the losers (which is where most traders fail---they do the reverse letting losses grow and gleefully taking small profits). Here's my first post: I just went long UUP at 23.76---the U.S. dollar. Remember, this is a TRADE not an investment, so I am not disagreeing with Gary. It's just that it's super overdone to the downside right now. Remember too that I take small losses and lose often, but when they work...! Shorted the Euro in January and held for months. Bought GDX yesterday at 47.15 which I am hoping to hold for months as well. I will try to remember to post when I exit as well. Generally speaking once you get a modest profit in a trade you should sell if it gets back to break-even. Good luck everybody!

Last point to go with my previous longish post: If no one is interested in these trades I won't bother to post. I'll post for a while to see what happens, but if you are interested say so or they'll go away. No sense wasting time and space.

A fair question about the size. It's hard to say because my entire net worth is liquid and can be traded, so % of what? I have five brokerage accounts. Let's just say that the size is decent. i do small trades but won;t bother to post those. I also VERY rarely average down so you needn't wonder about that (it's a losers game). If you are in the hole the market is trying to tell you you may be wrong!) I do average up, but it needs to be smaller each time.

UUP is about 10% of my trading account right now, and gold is 30% (after my recent GDX purchase) Remember with tight stop you can do a ton of something as long as you are sufficiently disciplined to get the hell out if it goes against you.

Looks like we're getting the smart money quickly buying into this sell-off past the "obvious" support level that retail traders see. Looks like commercials are increasing their long exposure and decreasing their short positions during the month of July based on COT data. Count me in on the long side. Now the hard part of holding on and not get shaken out!

I think you rock. The buy point was nearly perfect this week. I was buying because the GLD hit the 150 simple daily moving average which it has bounced off several times in the past year. As usual I was a little scared to buy, but your post helped me get my starter position on SLV going. Thanks.

The last time the dollar sunk into a three-year low, the move was accompanied by a 55% gold rally and a 78% silver rally... parabolic moves, which are referred to as "C" waves on this site.

I would note that gold has shown much better relative strength to other major asset classes this summer than in 2007. More subjectively, I would note that I expect the current 3-yr dollar cycle to bottom with a sense of crisis much like what we saw in the euro this spring.

Now, the typical safe haven during times of crisis is the dollar (via Treasuries), but if the buck is the problem, where does the money go? Gold, of course! And what do you think will happen to thin, little markets like gold and silver with all that safe haven-seeking cash chasing them?

It makes little sense to compare relative performance on a day-by-day basis. Consider that GDX finished the July intermediate low nearly 20% above the February intermediate low, while the SPX finished 4% BELOW the February low. Now you can see where the strength is.

Fascinating. I have a proprietary trading system that has been backtested to 1980 (no data mining or optimizing---simple rules). The buy signals imply an immediate (within 5 days) 1% or more rally in the SPX. I got a buy at the close. Signals are generated only about once a month. This makes me wonder about my Euro short (which worked well today) as if we rally you'd think the euro might also, but many correlations are breaking down. I b ought a slug of Q's at the close. Monday ought to be interesting. Have a good weekend everybody.

oops---meant to mention in the previous posts that the backtesting has shown the system to be 80% accurate over the past 30 years. Look for s short-term rally. It says nothing about what happens after the 1% rally has taken place.

Gary, the dollar has retraced exactly 50 percent of its move from last year's low to this year's high. That's a common retracement level and a likely reversal price. Even if it doesn't reverse here, the 62 percent retracement level would be another likely reversal area.

In order for us to know whether the dollar is seriously broken and heading to lower lows, we'd have to see it break the 78 percent retracement level, which will take a few more months at least.

I was not comparing gdx to s&p, I was comparing gdx to gold. I am not questioning the gold bull market, I am questioning the rationale for being in the miners vs gold.

Since Gdx was introduced in 2007, it has gained 20%, which is pretty poor compared to gold itself. More disturbingly, if you pull up a chart of the gold/xau ratio, you will see that the ratio has been headed up all 2010, after falling in 2009. In other words, gold stocks have been underperforming all year, despite the fact that they are more risky than gold itself. Some have posited that GLD has siphoned off investor interest since its introduction.

If you are an investor in pm stocks this is a serious issue. Aside from 2001 and 2009, when gold stocks were coming out of panic lows, gold stocks have gone nowhere relative to gold.

There are many gold stocks selling for not much more than they were in 2003, when gold was at 350. Ask yourself how you would feel watching the gold bull pass you by while you were in pm stocks.

Fwiw, I am not a troll but a longtime pm stock investor who doesn't want to miss out on the final leg of the bull market.

For those reasons I went physical gold for a large portion of my core. No gold miners, but some silver ones though. Others will have a different opinion. The logic for the miners is still there, but like yourself I didn't want to miss the bull.

I think what most people are failing to see is that miners had a huge moveoff the 08 bottom. Massivley outperforming gold and virtually every sector. Those kind of moves require a big consolidation period.

There is a huge resistance level at 500 that they haven't been able to break through yet. In 07 there was a reason miners were underperorming and that was skyrocketing energy costs. Those costs are now half what they were then.

Once the miners do finally break out of this huge consolidation they are now set up to rally huge. My guess would be a break out will lead to 50-100% gains from the breakout.

Here's what is going to happen. Most everyone by now is thinking the same way as you and have given up. When the breakout comes they will already be overbought, so no one will be willing to chase.

Then if they don't pullback and just get more overbought it will get harder and harder to chase. Eventually though they will succumb to the law of regression to the mean. So far every top has. And ultimately that and the resistance at 500 is what is keeping the miners subdued. Now though the 200 DMA has fully caught up so miners are set up to rally a long ways during this next leg of the C-wave.

The business model of miners does make them tricky investments. Financing often involves large and dilutive share offerings, while mine production must be constantly and expensively upgraded as old mines play out.

A lot of folks have expressed frustration at the stock performance of the silvers (ex-SLW). CDE has almost tripled it's float in recent years:

The question is: why bother with CDE at all when you have the option of buying silver through an ETF or closed-end fund?

The truth is, CDE has been a moneymaker -- for it's management. It's just as easy to print shares for themselves, without regard to the share price.

With mining stocks I expect leverage to silver in exchange for the risks I'm taking. I have no interest in watching CDE double when silver triples.

Pull up the charts. Silver and gold are in a bull market, but most miners are not. Only SLW has performed as it should in this bull market. The others have diluted shareholders relentlessly (CDE, HL, SSRI) and failed to execute. SSRI would have to triple from here just to reach its 2007 price. If you are not observant, you may be assuming it's going to do that any day now and licking your chops, but you mat be disappointed. Stocks represent shares of companies, and these are bad companies with bad management.

By the way, Gary, just because I make these points doesn't make me the dumb money. You have a tendency to suggest, when someone makes a point you disagree with, that they represent the "consensus" viewpoint, which automatically makes you a "contrarian", and therefore right by definition.

A question for you in line with the subject of miners and gold. Suppose a particluar miner has not performed as well as gold, and is posing as a lose right now. Say gold hits its peak, and this miner is still negative from purchase. A d-wave is almost certain in your mind, do you take the lose, or do you hold on knowing the bull will eventually correct your timing mistake?

The bull will eventually correct your mistake in gold, but that doesn't necessarily apply to any specific miner. An individual company can blow up or languish completely, regardless of what gold does.

Moreover, you have to think of a position not in terms of what your buy-in cost was, but in terms of what you could do with that money.

For instance, let's say you buy company x, and its price falls. You can either take the tax loss (which saves you money on taxes you pay on future gains) or you can sit there in a dog of a stock while the stock you wish you'd bought in the first place rockets higher. You would have been better off just selling the dog and buying the better stock. Moreover, you will have the tax losses to defray what you pay in capital gains.

The biggest mistake people make in investing is an emotional unwillingness to accept a loss. It makes them stay in losing positions waiting for them to "get to even" so they don't have to admit to themselves that they made a mistake. Pros simply accept that they are going to have a certain number of positions that aren't going to pan out. They weed out the losers quickly and re-allocate their capital into more productive uses.

"Tim Wood: Simply stated, the article and accompanying chart show that gold equities have suffered reduced leverage to gold as the bullion price has gone higher, whilst the gold ETF has enjoyed higher leverage.

By leverage, I mean the market value of the securities relative to the price of gold. In this case it is a very simple ratio that divides indexed market values by an indexed gold price so that we are comparing apples with apples.

Obviously that caught my attention because we should expect both types of securities to enjoy increasing leverage. In fact, my expectation was always that gold stocks would outperform any physical or derivative product.

TS: When was it that you first discovered this negative correlativity?

TW: I had been puzzled for some time that gold stocks were dragging an anchor. By that I mean it was apparent that the leading gold equities were very lethargic in responding to higher prices. It became very apparent in this most recent run to $1,260 per ounce. Gold stocks were, literally, dead in the water. Some of them were actually taking on water and at this point we are actually back to levels near the worst of the credit crisis in 2008. The gold ETF has continued to gain leverage

It was more puzzling because this was not isolated to, say, hedged or unhedged gold stocks, or small vs large ones. As a rule of thumb, the whole sector, especially North American listed stocks, was showing progressively less gearing to the gold price.

I just happened to wonder what would happen if I compared the leverage of a group of very liquid and respected gold stocks against the ETF. And frankly, I was stunned by the results, and more stunned that there is evidence of moderate reciprocal relationship – when the ETF loses leverage, gold stocks gain leverage.

TS: My first thought in looking at this is, "What an unfortunate time to be a shareholder"...but would this trend suggest increased share buybacks...and a "low prices cure low prices" effect?

TW: I think the share buybacks are an interesting proposition. It actually points to part of the problem in that the companies are guilty of issuing too much of their own paper. They do it relentlessly and in big chunks, and the lack of leverage exacerbates the problem because they end up having to issue more and more just to keep pace.

That said, the reality is that the gold industry has very little cash on hand. If I compare gold stocks with tech stocks it is frightening to see how little cash the miners have and yet many have multi-billion dollar projects in the pipeline.

So share buybacks are probably not viable given the upcoming financing requirements.

We also have to be realistic about the disappointments that the industry has dished out. There are a lot of companies limping about because they’ve shot themselves in one or both feet thanks to bungled projects or failed promises.

Investors don’t like the risk associated with these failures and that is a lot of the reason why the money flow has gone to physical instead of equities.

TS: Under what hypothetical conditions (geopolitical, financial) could we see a dramatic reversal of this trend?

TW: In my “happy” scenario, the global investment in gold is a fixed allocation to bullion so whatever flows out of the ETFs flows into stocks and vice versa. In that case gold stocks are incredibly cheap.

However, that does not reflect reality. We know that a lot of the ETF money is hot in the sense that hedge funds and other investors have diverted cash from other investments into gold.

Some of that went to gold stocks, but most of it - perhaps an increasing portion of it has gone to bullion. In fact, even the dedicated gold mutual funds have less invested in equities than they used to thanks to the availability of the ETFs.

That leaves me pessimistic about how this trade unwinds; and it will unwind. I do place a store in a reversion to the mean, but we lack sufficient data to know what the mean is.

Overall, my conclusion is that investors have withdrawn their confidence in gold stocks as a proxy for gold.

My greatest fear is for a mass exodus from the ETFs that kills the price and implodes the entire sector for a few months.

The best way for gold equities to recover their leverage is to get back to basics – stop diluting stock holders willy nilly, be more circumspect in projections, be more transparent, and get those margins up so that cash balances of $10 billion are not uncommon..."

TS: My first thought in looking at this is, "What an unfortunate time to be a shareholder"...but would this trend suggest increased share buybacks...and a "low prices cure low prices" effect?

TW: I think the share buybacks are an interesting proposition. It actually points to part of the problem in that the companies are guilty of issuing too much of their own paper. They do it relentlessly and in big chunks, and the lack of leverage exacerbates the problem because they end up having to issue more and more just to keep pace.

That said, the reality is that the gold industry has very little cash on hand. If I compare gold stocks with tech stocks it is frightening to see how little cash the miners have and yet many have multi-billion dollar projects in the pipeline.

So share buybacks are probably not viable given the upcoming financing requirements.

We also have to be realistic about the disappointments that the industry has dished out. There are a lot of companies limping about because they’ve shot themselves in one or both feet thanks to bungled projects or failed promises.

Investors don’t like the risk associated with these failures and that is a lot of the reason why the money flow has gone to physical instead of equities.

TS: Under what hypothetical conditions (geopolitical, financial) could we see a dramatic reversal of this trend?

TW: In my “happy” scenario, the global investment in gold is a fixed allocation to bullion so whatever flows out of the ETFs flows into stocks and vice versa. In that case gold stocks are incredibly cheap.

However, that does not reflect reality. We know that a lot of the ETF money is hot in the sense that hedge funds and other investors have diverted cash from other investments into gold.

Some of that went to gold stocks, but most of it - perhaps an increasing portion of it has gone to bullion. In fact, even the dedicated gold mutual funds have less invested in equities than they used to thanks to the availability of the ETFs.

That leaves me pessimistic about how this trade unwinds; and it will unwind. I do place a store in a reversion to the mean, but we lack sufficient data to know what the mean is.

Overall, my conclusion is that investors have withdrawn their confidence in gold stocks as a proxy for gold.

My greatest fear is for a mass exodus from the ETFs that kills the price and implodes the entire sector for a few months.

The best way for gold equities to recover their leverage is to get back to basics – stop diluting stock holders willy nilly, be more circumspect in projections, be more transparent, and get those margins up so that cash balances of $10 billion are not uncommon..."

Let me be clear. When I say dumb money I mean retail traders in general. That doesn't mean we all do stupid things it just means we are never going to have the kind of information that big institutional traders have. Let's face it they have research teams and lot's of money to buy info. that we are just never going to have access to.

They also tend not to trade on emotion. We've seen quite the display of emotion on the blog lately and not just from the perma-bears.

Smart money understands that markets go both ways in bull and bear markets alike. When an intermediate cycle is deep in the timing band for a bottom you don't press your bet. I tried as best I could to explain that when everyone was expecting the head and shoulders pattern to continue. And I'm doing my best again now that gold is also deep in the timing band for an major low.

However many emotional retail investor/traders will continue to ignore this because they want the trade to continue in one direction(usually they entered too late).

So I'm not suggesting anyone is dumb money specifically just that generally us little guys are never going to have they advantages of the big boys.

Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such position.